QUESTION FOUR She Dabibi Manufacturing Company Wises to evaluate the credit term
ID: 2806719 • Letter: Q
Question
QUESTION FOUR She Dabibi Manufacturing Company Wises to evaluate the credit terms offered by its four biggest suppliers of raw materials. The prime rate (KBR) is 12.0%, and D borrow short-term funds at a spread of 5% above the KBRR. Assume a 365-day year and that the firm pays its suppliers on the last day allowed by their stated credit terms. The terms offered by each supplier are as follows: abibi can Supplier 1 2/10 net 40 Supplier 21/15 net 60 Supplier 33/10 net 70 Supplier 41/10 net 5t0 Required: a) Calculate the interest rate associated with not taking the discount from each supplier. (5 marks) Assuming the firm needs short-term financing and considering each supplier separately, indicate whether the firm should take the discount from each supplier. b) (5 marks) If the firm did not need any short-term financing when should it pay each of the suppliers? c) (5 marks) d) If the firm could not obtain a loan from banks and other financial institutions and needed short-term financing, when should it pay each of the suppliers? (5 marks) What impacts, if any, would the fact that Dabibi could stretch its accounts payable (net period only) from supplier 1 to day 90 without damaging its credit rating have on your recommendation in part (b) with regard supplier 1? Explain your answer. e) (5 marks)Explanation / Answer
Cost of not taking discount = Discount rate / (1- Discount rate) x 365 / (Credit period – discount period)
Supplier 1 = 0.02 / (1- 0.02) x 365 / (40-10)
= (0.02 / 0.98) x (365 / 30)
= 24.83%
Supplier 2 = 0.01 / (1- 0.01) x 365 / (60-15)
= (0.01 / 0.99) x (365 / 45)
= 8.19%
Supplier 3 = 0.03 / (1- 0.03) x 365 / (70-10)
= (0.03 / 0.97) x (365 / 60)
= 18.81%
Supplier 4 = 0.01 / (1- 0.01) x 365 / (50-10)
= (0.01 / 0.99) x (365 / 40)
= 9.22%
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